TURKMENISTAN: IMF ACCEPTS "NEW DAWN" IN RELATIONSHIP WITH

UNCLAS SECTION 01 OF 03 ASHGABAT 000615 SIPDIS SENSITIVE STATE FOR SCA/CEN, EUR/ACE, EEB TREASURY FOR BAKER/LANIER COMMERCE FOR HUEPER AID/W FOR EE/EA E.O. 12958: N/A TAGS: PGOV PREL EAID ECON EFIN TX SUBJECT: TURKMENISTAN: IMF ACCEPTS "NEW DAWN" IN RELATIONSHIP WITH GOVERNMENT ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (U) SUMMARY: On May 8, International Monetary Fund (IMF) Deputy Division Chief (Middle East and Central Asia) Peter Winglee briefed representatives of international organizations on the delegation's recently concluded mission. In its official meetings, the delegation encouraged Turkmenistan's officials to look at policies that would sustain the unification and support of a stable exchange rate, such as open access to foreign exchange. To avoid potential instability, the IMF encouraged the government to keep current rates fixed at least until next year when the currency is redenominated. The government has the funds to prevent a black market from emerging if it "kept its nerve." Authorities were not looking for major increases in petrol prices for the rest of 2008, nor did the IMF expect food prices to increase further. The government is willing to consider wage increases to offset increased inflation, but wants to see where inflation actually settles. Overall, the IMF gave Turkmenistan a good report card after the visit. END SUMMARY ¶3. (U) At a May 8 donor meeting organized by the UN Development Program (UNDP),IMF Deputy Division Chief (Middle East and Central Asia) Peter Winglee briefed assembled participants on the recently concluded annual Article IV consultations with the Government of Turkmenistan on economic and monetary policy issues. (NOTE: The Article IV Consultation is the vehicle for the IMF's surveillance of economic policy and exchange rate issues. END NOTE.) The latest discussions were an outgrowth of a dialogue that began in 2007 and focused on policies to sustain the recent currency unification, particularly in the context of higher inflation. OFFICIALS ENCOURAGED TO SUSTAIN THE UNIFICATION ¶4. (U) Winglee reported that officials told the delegation that inflation increased to "the middle teens" as of March 2008, which Winglee recognized as "quite a problem." The delegation encouraged Turkmenistan's officials to look at policies that would sustain the unification and support a stable exchange rate. First, the government should ensure open access to foreign exchange. Next, it should promote trade liberalization, since high duty rates were not needed to restrain imports in light of the strengthened Turkmen manat. Winglee reported that authorities were "receptive" to this suggestion. ¶5. (U) In spite of the strengthened manat, Winglee acknowledged that price decreases had not been realized. High duties were a "major part" of this, but there was still a lot of uncertainty and hesitation on the side of the Government to reduce prices. As a result, the IMF delegation stressed the importance of building confidence in fiscal policy and a ready availability of foreign exchange at the current level. With regard to reserves, authorities acknowledged having the equivalent of twenty months of imports on hand, which was "quite high" and enough to support the unification. "WAIT AND SEE" APPROACH ON WAGE, PRICE INCREASES ¶6. (U) In terms of the fiscal policy, Winglee said the budget would be a major beneficiary from exchange rate unification. Much spending for goods and services is already at the market rate because they are bought from local contractors, which would ease the price transition. The IMF did not expect food prices to increase further. The government was willing to consider wage increases to offset potential high inflation, but wanted to see where inflation settles. In the meantime, it had adopted a "wait and see" approach in this regard. REDUCE BANKING CONTROLS VIA LIBERALIZATION ¶7. (U) The delegation discussed monetary policy and the importance of the Central Bank's focusing more on core central bank-related activities, including moving away from directed credits. The Central Bank, for which a new chairman was recently appointed, saw the current situation as a "new start," and an opportunity to allow banks to access foreign currency. This was a big step that would ASHGABAT 00000615 002 OF 003 not happen overnight. ¶8. (U) Other banking reform, such as measures to increase competition, develop the market and financial infrastructure like the payment system, and strengthening supervisory capacity, were also discussed. The IMF encouraged Turkmenistan to accelerate the introduction of International Financial Reporting Standards, which UNDP and USAID have been working on with the Central Bank. Winglee stressed that the dual exchange rate has been a major problem in gaining proper accountability in banks, and so unification was a good step forward. DATA QUALITY STILL A CONCERN ¶9. (U) Before breaking for questions, Wingless said that data issues and improving the data quality remained a challenge. The 2007 GDP growth rate of 11.6% was "more realistic" than the rate in the high teens reported in previous years. Although the current figures were lower than past reported levels, this did not reflect a slowing of growth, but better methodology in determining the rate. Current estimates of nominal GDP was "not too bad." A part-time IMF advisor just finished an initial three-week consultation, and identified deflators as a problem to work on in the future. QUESTIONS ON INFLATION, SOCIAL IMPACT OF UNIFICATION ¶10. (U) In response to a question, Winglee said the 2008 forecast for inflation was 12-14%, subject to increased availability of imports and decreased duties. As for 2007 inflation figures, the government reported 6% inflation for 2007, but inflation in February and March pushed the rate to 8.8%. Although the delegation did informal research to check these figures, Winglee stressed the IMF did not have an alternate measure. Rather than make recommendations on controlling government expenditures, the IMF encouraged improving the quality of expenditures. The IMF doesn't view budgetary spending as a particular issue. The IMF was not involved in improving the quality of public spending, but encouraged the government to bring expenditures on budget. Winglee acknowledged that the IMF did not ask the government to restrict spending, but did encourage it to reprioritize. ¶11. (U) On the possible development of a black market exchange rate developing since the current rate was perceived to be artificially set, Winglee said the best way to stop the development of a parallel market was to supply lots of foreign currency at the official exchange rate. The government had the funds to prevent a black market from emerging, if it "kept its nerve" and followed standard policies. The issue is that many oil exporting countries have found it convenient to appreciate foreign exchange rates to increase real incomes. There was real income increase since 2000 in this country, so some appreciation of the market rate would be appropriate. To improve the business environment and competitiveness, however, they needed broader based reforms to accompany unification measures. At current exchange rates, general manat wages were not excessive, but whether they were sustainable depended on other factors. ¶12. (U) Replying to a question about government awareness of hardships on the population, including difficulties in buying basic food commodities, Winglee said that the government was aware of the much higher cost of food. There was an ongoing debate in the government on how to address it. The old-school approach was to import subsidized products. However, higher agricultural prices were actually beneficial for farmers, so they may have to increase wages and pensions to compensate. EXCHANGE RATE EXPECTED STABLE FOR ONE MORE YEAR ¶13. (U) Given potential instability and risk of capital outflows, the IMF encouraged the Government to keep current rates fixed at least until next year when the currency is redenominated. Actually, there was a possibility of inflows, and hence pressure for further appreciation. Due to the appreciation of the foreign exchange rate, nominal GDP substantially increased, but if converted to U.S. dollars at the new unified rate, it would be reduced. The ASHGABAT 00000615 003 OF 003 preliminary calculation for 2007 per capita GDP was $4,300, but at the new rate was approximately $3,000. The IMF has not restated the 2007 GDP at the new exchange rate, but it would be in the range of $2,500-3,000. ¶14. (U) Although the time necessary to build confidence in the banking system was hard to predict, Winglee said that it could be restored quickly with an outspoken Central Bank Governor. If it kept macro-economic policy reasonably sensible, Turkmenistan had the reserves to back it up. Previous rationing was a physical shortage of manat rather than a question of U.S. dollar supply or wavering commitment to following policies. This was envisioned as the first of many reforms, and other countries, like Poland, had taken several years to effect similar changes. ¶15. (SBU) COMMENT: The IMF gave Turkmenistan a generally good report card after its most recent Article IV consultations. Government officials reportedly told the delegation that they did not want to talk about the past, and that they see the current situation as a "new dawn." Given its limited ability to engage in the past and the tentative relationship it is rebuilding, the IMF has accepted this approach. END COMMENT. HOAGLAND